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Filing Gross Accounts Pending VAT Registration

Is it technically correct to file accounts containing gross figures pending VAT registration?

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Client company exceeded VAT threshold in draft accounts of 2018, but unresponsive director has failed to respond to us or VAT register. Until today, that is, because Companies House are now threatening prosecution.

In the light of which, would it be technically correct if we were to file at Cos House our draft FRS105 accounts containing gross figures? Until such time as the client registers for VAT, whereupon those gross accounts could be replaced by net of VAT accounts? If such course of action is correct and legal, then that would avoid any potential charge of our having delayed submission and thereby caused Companies House to proceed with its prosecution.  

The alternatives are:

(i) File net of VAT accounts in anticipation of the client's impending VAT registration. I'm uncomfortable with that, not least because I'm not convinced the director will ever register; also because input VAT is impossible to quantify at this stage; and, finally, I would much prefer to overstate rather than understate profits.

(ii) Do nothing, but be laid open to a possible charge from the client of having failed to halt proceedings by lodging accounts (albeit containing gross figures) at Companies House.   

So there it is. Would filing the draft FRS105 accounts, which contain gross figures, at Cos House be technically correct for the time being? 

 

 

Replies (80)

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paddle steamer
By DJKL
29th Mar 2021 15:09

Change accounts year end to buy some time?

(edit, forget above, just spotted you are talking 2018 accounts, far too late)

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By Roland195
29th Mar 2021 15:18

I would be more concerned with if the client is solvent as of today (allowing for over two years of hitherto unknown VAT liabilities) rather than the accounts for a period in 2018.

Have you considered talking to Companies House to see if they will agree to hold off any action until you find this out?

There will be £1,500 of penalties for 2018 alone with possibly up to £3,000 for 2019.

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Replying to Roland195:
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By I'msorryIhaven'taclue
29th Mar 2021 15:26

Many thanks Roland,

The client is barely solvent, and I am quite certain this will finish him and his company off. I've already played all the stay of execution files with Companies House, which went on for around 12 months until lockdown put the matter on hold a year ago.

Aside from the penalties that you mention, the company will owe a nominal 16.6% of its t/o for the past 3 years or so.

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Replying to I'msorryIhaven'taclue:
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By Roland195
29th Mar 2021 15:34

Then it seems like you have no option but to refer the matter on to an Insolvency Practitioner - the notice of their appointment should take care of any pending action for non filing (although I don't know if they will still pursue the director/s - not heard of it in real life for years).

If the client won't (or can't afford to more likely) take you advice about an IP, I'd suggest you get the formal disengagement paperwork prepared (and yes, the SAR report) but I wouldn't be filing the 2018 accounts regardless if we know it's insolvent now.

Hope you got fees upfront.

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Replying to Roland195:
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By I'msorryIhaven'taclue
29th Mar 2021 15:57

Hard to say regarding fees - client stopped paying their monthly subscription circa late 2018. Which is fine, because as you say this is headed towards an IP.

Unless, of course, the client is able to escape VAT registration on the grounds that the threshold was crossed temporarily. I feel bound to go through the motions on that. Plus of course I'm only guessing at this stage that the client will go under - I've yet to see any books beyond 2018 (and, to boot, suspect there are none). So again, I'm going through the motions.

What I'm unable to fathom is whether it would be correct, in the light of the above paragraph, to put a brake on Cos House actions by filing what I have been sat on for a couple of years - draft accounts with t/o just above the VAT threshold.

I suppose it could boil down to whether it is correct to submit such accounts until it is known for certain:
(i) whether the company is liable to register for VAT; and
(ii) whether the director is going to so register for VAT, or go the IP route.

Or, alternatively, should I estimate and accrue for the VAT element in spite of its uncertainty, and submit that to Cos House? Or do nothing, and hope not to be exposed to a charge from the client of failing to act?

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Replying to I'msorryIhaven'taclue:
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By Roland195
29th Mar 2021 16:23

In my opinion, you don't have a case to answer for negligence - you have done everything possible but it is now simply too late to be able to solve the issue by simply filing the accounts. If the client had responded to you timeously, there may have been a chance to avoid VAT registration but that ship sailed long ago.

As the 2019 accounts & possibly even 2020 are also now late, there is no guarantee this will stop the legal action anyway.

Are we talking about Companies House striking the company off or prosecuting for failure to deliver?

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Replying to Roland195:
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By I'msorryIhaven'taclue
29th Mar 2021 17:03

Luckily I have a trail of regular reminders to this client regarding this matter, even during this past year's lockdown.

I'm grateful for your opinion regarding the issue of negligence.

This is indeed a prosecution for failure to deliver, and I suppose my doubt was that by sitting on draft accounts and stubbornly refusing to file them I'd be on a hiding to nothing. At best, I'm ensuring the director is prosecuted; at worst, unnecessarily should exceeding the VAT reg threshold transpire to have been a temporary blip.

I'd dearly love to adapt these drafts with whatever added notes are necessary, file them gross at Cos House and resign pronto; before the client pays the 2 or 3 years arrears on his monthly instalments and puts the ball back in our court!

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Replying to I'msorryIhaven'taclue:
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By Paul Crowley
29th Mar 2021 17:35

The trouble with PII is that the insurance companies tend to look at the costs of defending court fees etc and then look at claim being made.
They do not pay the excess and in that scenario settlement at £10,000 is easier than arguing
And once notified all contact forbidden without approval, so it looks to claimant and their legals as if we are foundering.

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Replying to Paul Crowley:
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By I'msorryIhaven'taclue
29th Mar 2021 17:46

It's a racket alright.

We got rear-ended by a 4 x 4 which wrote off our Leon and paid out peanuts; nowhere near its replacement value.

To make matters worse, we both hopped out the car to check on daughter's dog which was in its boot cage - unharmed, luckily - and got filmed on the 4 x 4's dashcam. So bang went our £3k each whiplash compo!

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Replying to I'msorryIhaven'taclue:
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By Bobbo
31st Mar 2021 15:33

I'msorryIhaven'taclue wrote:

To make matters worse, we both hopped out the car to check on daughter's dog which was in its boot cage - unharmed, luckily - and got filmed on the 4 x 4's dashcam. So bang went our £3k each whiplash compo!

Are you actually complaining about being unable to make a false injury claim?

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By Truthsayer
29th Mar 2021 15:23

I would insist he sign the VAT registration form first, and only then complete the accounts. I would resign if he fails to sign it within seven days. If the VAT is difficult to quantify, just make an estimate with a disclosure note.

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Replying to Truthsayer:
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By I'msorryIhaven'taclue
29th Mar 2021 15:38

Thanks Truthsayer,

I've been asking for 2 years plus for the following year's books and records in order to ascertain whether creeping above the VAT registration threshold in 2018 was a temporary state of affairs; or, indeed, whether there are any other reasons by which the company might escape liability to VAT register. That is sufficient to preclude me from insisting the company VAT register here and now. (Bear in mind, also, that potentially there's a ruinous £50k+ at stake in back-VAT and fines).

My predicament is that, were I to resign or indeed fail to file the draft accounts - such as they are - at Cos House then I'm potentially open to a charge of negligence (failure to act, for instance). Hence the crux of the matter for me is whether or not it is correct and legal to file gross accounts at Cos House as an interim measure, until such time as the matter of VAT registration is resolved and implemented.

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By Paul Crowley
29th Mar 2021 15:32

I would do what you suggest but would want some money in case he does the ostrich thing again
As far as I am concerned once registered you can just fix the figures during a following year.
If creditors wrong in 18, just fix it in 19
Timing difference only, no permanent difference in tax until the tax rate changes

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Replying to Paul Crowley:
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By I'msorryIhaven'taclue
29th Mar 2021 15:44

Thanks Paul,

I think the fees have gone out of the window on this one. Not like me, but blood out of a stone situation.

I'm reluctant to estimate the VAT element as I'm wary of submitting net of value accounts which understate profits (albeit to Companies House; I won't be submitting anything to HMRC until VAT registration is done and dusted). My preference would be to overstate profits (by submitting gross figures).

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Replying to I'msorryIhaven'taclue:
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By Paul Crowley
29th Mar 2021 15:48

Company's credit rating is already severely damaged.
But on a similar I had recently I made sure the accounts would not encourage lending.

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Replying to Paul Crowley:
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By I'msorryIhaven'taclue
29th Mar 2021 16:20

Lordy, I hadn't given a thought to BBLs. The company could be swimming in cash by now!

You'd be excused for imagining that not having filed accounts since 2017 would serve to alert banks. Not my problem, thankfully, as I've yet to clap eyes on the past few years' books.

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By Wanderer
29th Mar 2021 15:35

Often considered as a theoretical point.

Should accounts reflect:-
a) What actually happened (gross)?
b) What should have happened (net)?

Could apply the same query to the SATR of an unincorporated trader.

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Replying to Wanderer:
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By I'msorryIhaven'taclue
29th Mar 2021 16:06

Thanks Wanderer,

I think you've hit the nail on the head.

To accrue, or not to accrue! I'm reluctant to amend the drafts I have by accruing for VAT, and filing; I really would rather overstate the profit than understate.

In the circumstances, I'm wary of doing nothing. This is a PITA client who has had his head up his derriere for two years plus, and might exercise my PII when, as is currently happening, Cos House prosecute him as director. The finger of blame could well point towards my failure to submit "gross" accounts as a contributory factor. Ouch!

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Replying to Wanderer:
RLI
By lionofludesch
29th Mar 2021 18:52

Wanderer wrote:

Often considered as a theoretical point.

Should accounts reflect:-
a) What actually happened (gross)?
b) What should have happened (net)?

Could apply the same query to the SATR of an unincorporated trader.

I'd go for b. The company owes this money.

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Replying to lionofludesch:
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By Wanderer
29th Mar 2021 20:21

But that's the conundrum isn't it? No doubt the company owes the money but should T+F accounts reflect what a company did or what they should have done?

If this was an audit and the director has been made aware of the obligation to register but has made no efforts to do so, as outlined, should the accounts reflect the gross figures and then be qualified outlining the failure and, as a result, the liability being omitted?

Aren't T+F accounts in this case the gross accounts with disclosure of the failure? FRS105 permits additional disclosure.

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By carnmores
29th Mar 2021 16:06

personally i would spend as little time as possible and submit gross and stick in a contingent liability. the question is will you submit without directors approval , i think not . resign

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Replying to carnmores:
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By I'msorryIhaven'taclue
29th Mar 2021 16:11

Ahha, I should have made clear. Client would jump at submitting the (gross) drafts that I have to Cos House. Director would not only approve but has already requested that.

My bad for not making that clearer. But you'll glean from that why I'm a little wary of not doing something that I might properly and legally do (ie file these gross drafts) or indeed vice versa by doing something that I shouldn't.

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By frankfx
29th Mar 2021 16:18

Accounts are required to show a true and fair view.

There is a material liability for VAT.
Failure to notify and register, does not change the fact that a liability exists.

At accounting date .
And approval date.

Is there a corporation tax liability, to be amended by reduced profits?

Can client belately charge output vat to any clients...if still around and willing.?

Client approves accounts prepared by you..... knowingly incorrect.

Going concern review 12 months beyond approval date.
Company insolvent when HMRC notified?

May be best to exit now, stage left pursued by bear , client.

Or hands up when HMRC pursue client.

OP
Once again dilemma many of us have, want to help client.
But shaving mirror moments when we question our own professionalism, for a PITA.....and pittance reward?

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Replying to frankfx:
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By I'msorryIhaven'taclue
29th Mar 2021 16:51

Thanks frankfx,

As a question of certainty, these (FRS105) accounts exceeded the registration threshold for each of the final months of the year (ended 31 March 2018). Client has resisted all attempts to let me have the following year's books and records - which means of course that exceeding the threshold might yet turn out to have been a temporary state of affairs.

So I suppose the question must be whether there is a sufficient degree of uncertainty regarding that VAT registration.

There is indeed a Corp tax liability, which would diminish if not disappear were I to redraft the accounts net of VAT in order to accomodate that liability. Not much chance of recharging VAT to customers - 75% of the business was for private individuals. Some of the corporate clients might wear it I suppose; although we are some years down the line.

Going concern review? Without seeing the last few years' books and/or preparing accounts I have little idea of the company's solvency. Other than, potentially, there'll be a huge and potentially ruinous liability if the company is compelled to VAT register.

My main focus, though, is not on helping this client - this has been a PITA for a number of years - but on discharging duties and obligations. Avoiding any accusation from the client that by failing to file (gross) accounts at Cos House, albeit as an interim measure, I might arguably have contributed towards Cos House prosecuting this director. To adapt what you've said: "Client approves accounts prepared by you..... knowingly incorrect" then I'm left wondering whether a note to these (FRS105) accounts regarding potential liability to VAT register (and, I suppose, a consequential note related to Going Concern) would make those accounts "correct".

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By SXGuy
29th Mar 2021 16:25

Personally I would file gross, purely on the basis that until he registers for vat and hmrc force a determination out of him, those were the gross sales at that time.

If vat ends up being due make a correction at that point in time.

Accounts should reflect what happened not what should have happened in my opinion.

Whether or not you correct the accounts once determination of vat is established that's another mater as well. Can't work for free after all!

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Replying to SXGuy:
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By I'msorryIhaven'taclue
29th Mar 2021 17:21

Thanks SXGuy,

I think it's a racing certainty that, one way or another, I won't be working for this client by the time VAT liability is established.

I'm grateful for your input - it certainly seems to me that filing gross with a note to the accounts is less perilous than filing with net of VAT figures with a note (because the latter serves to disappear most or all of the corporation tax liability). And we are talking here of Cos House y/e 2018: there are two further sets of accounts due since; its bare minimum FRS105 B.S; and under no circumstance will I be voluntarily filing anything with HMRC.

At the end of the day, this client has obstructed any attempt to ascertain his liability, and indeed prepare any subsequent accounts, for a number of years knowing that every sale he makes digs him deeper into (VAT) debt. I think it vital not to give him any excuse to point the finger and cry foul! As my dear old grannie used to say, tears are the last refuge of a scoundrel!

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Replying to I'msorryIhaven'taclue:
blue sheep
By Nigel Henshaw
30th Mar 2021 07:03

I'msorryIhaven'taclue wrote:
As my dear old grannie used to say, tears are the last refuge of a scoundrel!

haha, I like it.

File gross gets my vote, you have made the position clear to the Director and that is what he has asked you to do, its his signature

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By carnmores
29th Mar 2021 16:34

you can go over the registration limit and not have to register but you need clearance and proof that registration will not be breached for a reasonable amount of time . file gross the accounts are the director's liability not yours

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By carnmores
29th Mar 2021 18:20

TAKE YOUR NAME OFF THE ACCOUNTS

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Replying to carnmores:
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By I'msorryIhaven'taclue
30th Mar 2021 11:10

Thanks Carnmores, good shout!

Maybe I should just use my nom-de-plume :)

I've had a few can't-be-*rsed directors over the years, but this one takes the biscuit. The latest twist is that the last-chance notice from Cos House to file (not just one, but two sets of) accounts is already 3 weeks old and expires this bank-holiday weekend.

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A Putey FACA
By Arthur Putey
29th Mar 2021 18:20

Trying to make sense of this thread. The focus seems to be on CH with not much mention of HMRC.

Without further work to establish whether the "exceeding" was only temporary how do you quantify the potential VAT liability?

I'm inclined to go with the opinion that in the circumstances (of not being VAT registered at the time) going with gross figures but if the client has not responded to your earlier requests and has stopped paying retainer fees I don't see how you can go any further without fees to cover the additional work, which inevitably would involve discussions with HMRC.

At the end of the day CH will accept anything in good faith and if the client had approved any old accounts 2 years ago he could have escaped the penalties which he has no hope of escaping now unless he allows CH to dissolve the company. But then he risks being deemed unfit to run another one. But isn't that how double glazing companies used to be run?

I think that without fees to try and sort it out, and even then I would want an agreement from the client that it was their fault, I'd walk.

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Replying to Arthur Putey:
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By I'msorryIhaven'taclue
29th Mar 2021 19:34

Thanks Arthur,

Cs House only; no chance of anything being submitted to HMRC unless and until the VAT issue is resolved, one way or another.

I'll chalk one up for gross accounts. I'm afraid of disappearing the C.T. liability if I accrue and produce net of VAT accounts; besides which I'd look awfully silly if the company were to slip the noose over VAT registration.

I don't think I could go any further with this client, even if I wanted to. I've just learnt at close of business that he's been sat on the prosecution notice, which expires this week, since the start of the month. True to form!

Which news I suppose serves to ease my concern over the potential for being "accused" by the client of failing to prevent all the ruination you have mentioned (by failing to file something!)

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By paulwakefield1
30th Mar 2021 08:51

Approaching this from the other direction, it seems to me that not allowing for a VAT liability would, in subsequent periods, meet the criteria for a prior year adjustment. i.e. a material error (FRS102 10.19). So, in my view, a VAT liability should be accounted for - perhaps as a provision (haven't really thought that through).

But if the client won't play ball, I would walk as advocated by others.

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Replying to paulwakefield1:
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By I'msorryIhaven'taclue
30th Mar 2021 11:28

Thanks Paul,

Turns out this one set of accounts is insufficient, as Cos House's deadline for not just the accounts in question but also the subsequent year's accounts is just a few days away. Which makes me feel better because whatever I do with these particular accounts - whether do nothing, file gross, or file net - is no longer critical in his being prosecuted by Cos House (because he's going to cop it regardless).

I'm leaning towards filing something at Cos House - whether gross with a note or net with a note - just so that I can walk away with the least amount of hassle.

I'm conscious, from another thread, that whichever course I steer my actions are likely to be subject to close scrutiny by a new agent:
https://www.accountingweb.co.uk/any-answers/does-the-client-have-any-rec...

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Replying to I'msorryIhaven'taclue:
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By paulwakefield1
30th Mar 2021 11:39

Are you ICAEW? If so, worth a call to their ethical helpline to help set your mind at rest. I imagine the other bodies have similar.

Good luck

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Replying to paulwakefield1:
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By I'msorryIhaven'taclue
30th Mar 2021 12:16

I guess the good thing about Aweb is the facility to conduct a grass-roots straw poll to find out what people at the sharp end would do.

I thought about calling my association, as in essence I was seeking a technical reply; but I doubt anyone would have legislated for such a wascally wabbit of a client in quite such a last-minute-pickle of a scenario. So I'll be sticking with the panel's advice on this one.

Cr*pp! I'm slipped into mixed metaphor mode. Lunch, everyone!

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Replying to I'msorryIhaven'taclue:
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By Roland195
30th Mar 2021 11:42

I wouldn't give a button for the opinion of a new agent in the unlikely event there is one.

I'm a little surprised that this client hasn't yet met the man in the pub (or the man on the socially distanced walk) who has advised to send in a DS01 and hope for the best.

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Replying to Roland195:
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By I'msorryIhaven'taclue
30th Mar 2021 12:15

I'm beginning to think a socially-distanced someone must have told him to sit back, do nothing, and wait for his company to be struck off by Cos House. And it's no doubt a bit of a shock to him that Cos House are prosecuting him personally, rather than take action against the company.

The Aweb thread that I linked to, above, provides an interesting contemplation of how a freshly appointed accountant - when furnished with his newly acquired client's version of events - has the potential to be something of a malevolent force. Normally I too wouldn't give a button; but an action against a director by Cos House is I suppose serious enough for me to ask myself - and, for that matter the panel - whether to guard against dropping the ball.

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Replying to I'msorryIhaven'taclue:
RLI
By lionofludesch
30th Mar 2021 12:28

Do what you agreed to do and then say goodbye.

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Replying to lionofludesch:
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By I'msorryIhaven'taclue
30th Mar 2021 14:41

Thanks Lion,

Delicate matter, perhaps with a higher duty of care; not least because of the potential consequences mapped out by Cos House letter to director:

Unless you deliver documents... within 28 days of the date of this letter, the Prosecuting Solicitor may take legal proceedings against you [personally]. A summons could be issued without any further warning letters being sent to you...
If convicted, you will acquire a criminal record and could receive a potentially unlimited fine for each offence ie each document not delivered on time. You could also be disqualified from acting as a director for up to 5 years...

I guess we're all going to see more of these letters as BBLs are defaulted upon.

And just how much false hope is given to the director in the penultimate para, which reads:

If you no longer need the company, you may be able to remove it from the register. You can do this online...

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Replying to I'msorryIhaven'taclue:
RLI
By lionofludesch
30th Mar 2021 15:08

I'msorryIhaven'taclue wrote:

Delicate matter, perhaps with a higher duty of care; not least because of the potential consequences mapped out by Cos House letter to director:

Whichever course you decide upon, make sure it's backed up by the Letter of Rep which the director signs.

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Replying to I'msorryIhaven'taclue:
A Putey FACA
By Arthur Putey
30th Mar 2021 14:47

You seem concerned about filing something, as opposed to nothing. Is that because the clients fees paid already cover the preparation and filing of something i.e would walking away mean gining him a refund (which might well be worth it for peace of mind)?

As discussed, the problem here is getting the client to sign off on something only on the basis of heavy caveats (and anonymity on the accounts) given by you, and on submitting something triggering a penalty that he can't/won't pay. But if you can't do any work to further investigate the VAT position, I don't think its the end of the world not to include a provision for a liability you are not sure will arise.

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Replying to Arthur Putey:
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By I'msorryIhaven'taclue
30th Mar 2021 15:06

No refund involved. Quite the reverse, actually, as I'll be writing off fees on this one.

But we are contracted to produce accounts, and that's been fulfilled to (let's say) draft stage whereupon the client has been asked for 18 months for missing details from (what amounts to) his sales daybook so as to facilitate precisely when during the AP the VAT reg'n threshold was first breached. Client would undoubtedly be willing to sign anything to achieve a stay of execution over this prosecution; hence I was bound to assess just what might be filed as an interim measure, pending further VAT assessment work.

All to no avail, as the latest twist in the tale is that he would also need the subsequent year's accounts (and by the looks of it the following year's again, to 31 March 2020) to avoid prosecution. By Thursday (which I've just noticed is April fools' day) because the director sat on the letter for 3 weeks, until yesterday.

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Replying to I'msorryIhaven'taclue:
RLI
By lionofludesch
30th Mar 2021 15:43

I'msorryIhaven'taclue wrote:
By Thursday (which I've just noticed is April fools' day) because the director sat on the letter for 3 weeks, until yesterday.

Ach well, if the fella is that gormless, I wouldn't be too concerned if it was done after Easter.

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Replying to I'msorryIhaven'taclue:
A Putey FACA
By Arthur Putey
30th Mar 2021 15:56

Will they actually prosecute, or is it likely they'll just start the strikeoff process?

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Replying to Arthur Putey:
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By I'msorryIhaven'taclue
31st Mar 2021 12:09

Good question. The letter doesn't say they will prosecute; just that the matter will be considered by Cos House prosecuting solicitor.

I think we're going to see a lot of this in the near future, as companies with BBLs go under.

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By bernard michael
30th Mar 2021 14:02

You can't file net of VAT figures as the client isn't VAT registered

You can only go with what you have ie gross figures

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Replying to bernard michael:
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By I'msorryIhaven'taclue
30th Mar 2021 14:23

Thanks Bernard,

I'm leaning towards filing gross, with a prominent and unmissable note re compulsory VAT registration. Although likely, VAT registration is not yet a certainty. And I'm loathe to provision by guesstimating net of VAT accounts, if only because that would serve to wipe out the C.T liability.

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Replying to I'msorryIhaven'taclue:
A Putey FACA
By Arthur Putey
30th Mar 2021 14:54

In a wierd and strictly hypothetical way, if there was no CT liability and the company was later put into the strike off process one way or the other, HMRC would be unlikely to object (assuming there is no PAYE owing)!

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Replying to Arthur Putey:
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By I'msorryIhaven'taclue
30th Mar 2021 15:14

I guess that's the potential double-whammy effect of stating the figures net, thereby disappearing the C.T. liability, and then the client either failing to register for VAT or otherwise (by hook or by crook) avoiding such registration.

No PAYE owing, no C.T arrears. Although HMRC have already objected to a Cos House strike-off, and blocked it. Maybe director's UC claim, perhaps.

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